"We wouldn't like to wait for too long. If the banks are not able to provide options, then the alternate mechanism (AM) group can make suggestions," the official told the newspaper. He hinted there could be a merger in the second or third quarter of the current fiscal.

The merger process of Bank of Baroda, Vijaya Bank and Dena Bank had started in October last year. On April 1, Vijaya Bank and Dena Bank were merged into Bank of Baroda to form the third-largest bank in the country.

However, the official said the second merger does not have to involve three parties. "We will be looking at various combinations. It has to be organic. Besides, we will like some of these large banks to further consolidate their balance sheets in the first two quarters," the official told the newspaper.

On the flip side, some government officials do not believe now is the right time for another merger as BoI has just emerged from the Reserve Bank of India's (RBI) prompt corrective action (PCA) framework. The PCA is a set of guidelines set by the RBI for banks that have weak financial metrics.

The other two, PNB and UBI, are also in recovery stages, the report quoted one government official as saying.

Mergers are not the answer to every problem in the banking sector and the government should open itself to alternatives other than creating too-big-to-fail structures, a senior executive at a public sector bank told the newspaper.